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If you provide care to an individual who has a physical, mental, or emotional handicap, the difficulty of care payments you receive are generally excluded from income. Review the information below to determine how to report these payments, if necessary, on your tax return.

According to the IRS Certain Medicaid Waiver Payments May Be Excludable From Income website:

On January 3, 2014, the Internal Revenue Service issued Notice 2014-7, 2014-4 I.R.B. 445. Notice 2014-7 provides guidance on the federal income tax treatment of certain payments to individual care providers for the care of eligible individuals under a state Medicaid Home and Community-Based Services waiver program described in section 1915(c) of the Social Security Act (Medicaid Waiver payments).

Exception: Difficulty of care payments are not excludable to the extent that the payments are for more than ten qualified foster individuals who have not attained age 19 or five qualified foster individuals who have attained age 19.

Form 1099-MISC, Box 3:

Generally, report this amount on the “Other income” line of Schedule 1 (Form 1040) Additional Income and Adjustments to Income (or Form 1040-NR U.S. Nonresident Alien Income Tax Return) and identify the payment. The amount shown may be payments received as the beneficiary of a deceased employee, prizes, awards, taxable damages, Indian gaming profits, or other taxable income. See Pub. 525 Taxable and Nontaxable Income. If it is trade or business income, report this amount on Schedule C (Form 1040) Profit or Loss From Business or Schedule F (Form 1040) Profit or Loss From Farming.

Form 1099-MISC, Box 7:

Shows nonemployee compensation. If you are in the trade or business of catching fish, Box 7 may show cash you received for the sale of fish. If the amount in this box is SE income, report it on Schedule C (Form 1040) or Schedule F (Form 1040), and complete Schedule SE (Form 1040) Self-Employment Tax. You received this form instead of Form W-2 Wage and Tax Statement because the payer did not consider you an employee and did not withhold income tax or social security and Medicare tax. If you believe you are an employee and cannot get the payer to correct this form, report this amount on the line for "Wages, salaries, tips, etc." of Form 1040 (or Form 1040-NR). You also must complete Form 8919 Uncollected Social Security and Medicare Tax on Wages and attach it to your return. If you are not an employee but the amount in this box is not SE income (for example, it is income from a sporadic activity or a hobby), report this amount on the "Other income" line of Schedule 1 (Form 1040) (or Form 1040-NR).

To enter the Form 1099-MISC, Box 7 income on Schedule C (Form 1040) (if you have not already entered the applicable Schedule C information):

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Business Income in the Federal Quick Q&A Topics menu to expand, then click Business income or loss from a sole proprietorship.
  3. Click + Add Schedule C to create a new copy of the form or click Edit to review a form already created.
  4. Continue with the interview process to enter all of the appropriate information.
  5. On the screen titled We need to know if Taxpayer/Spouse received any of these for their work in 2020, click the 1099-MISC box, then click Continue.
  6. Click + Add Form 1099-MISC to create a new copy of the form, then click Continue until you reach the screen titled 1099-MISC: Enter information on form.
  7. Click the Switch to Form Entry (optional) link near the top to open the Quick Entry window, enter all of the applicable information from your Form 1099-MISC, then click Save & Close.
  8. Select the applicable "Schedule C" option to assign the Form 1099-MISC you are currently completing from the Assigned schedule or form drop-down, then click Continue.

Once you have entered the Form 1099-MISC income, the program will bring you through additional screens to complete Schedule C. To enter the excludable amount as an expense, continue to the screen titled Great! Let's get started on expenses for this business, then click Enter expenses. Continue to the screen titled Enter any other expenses and Qualified Medicaid waiver payment exclusions for this business, enter the excluded Qualified Medicaid waiver payments exclusion (Notice 2014-7) amount, then click Continue.

To remove the Self-Employment Tax by entering an adjustment for Schedule SE:

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Taxes in the Federal Quick Q&A Topics menu to expand, then click Self-employment tax adjustments.
  3. Continue with the interview process to enter all of the appropriate information.
  4. On the screen titled Self-Employment Tax - Adjustments, enter the Other adjustments (+ or -) income amount as a negative number which should be exempt from self-employment tax, then click Continue.

Form W-2:

Box 1. Enter this amount on the wages line of your tax return. If you choose to apply the Notice to payments received in 2020, you will enter the income in the Wages and Salaries section of the Federal Q&A, but will also report the excludable amount as a negative adjustment.

To enter the Form W-2, see Form W-2 - Entering in Program.

When you print your return, the "See Attached" text will print to the left of Line 22 of Schedule 1 (Form 1040). An attached sheet will print with the return titled "Other Income - Supporting Details for Schedule 1 (Form 1040), Line 22" which will print both the description and amount that was entered.

Additional Information:

  • Generally the payor should not issue a Form W-2 or Form 1099-MISC Miscellaneous Income if they know the difficulty of care payments are excludable from your income. If you receive a Form W-2 or 1099-MISC reporting excludable difficulty of care payments, notify the payor that you are choosing to exclude the payments from your gross income. They should file and issue a corrected Form 1099-MISC or Form W-2C Corrected Wage and Tax Statement. Otherwise, use the previous information to report the income and exclusion.
  • The IRS is allowing taxpayers who received and reported payments in prior years to amend those prior year returns in order to exclude the income based on the new rules outlined in Notice 2014-7. Generally, for a credit or refund, you must file Form 1040-X within three years (including extensions) after the date you filed your original return or within two years after the date you paid the tax, whichever is later.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.

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